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Obamacare Raises Income Taxes on Middle Class Families with High Medical Bills

12/14/2012 12:52 pm ET | Updated Feb 13, 2013

When Nancy Pelosi was Speaker of the House, she famously said that Congress should pass Obamacare into law so that we could find out what was in it. It's now clear she was not talking about the American people, but rather members of her own caucus. This week, 18 senators and senators-elect echoed Claude Raines in Casablanca and were "shocked, shocked," to find a tax increase on medical devices deep in the heart of the Obamacare legislation they voted for. These Democrat Senators -- including Massachusetts Senator John Kerry -- voted for the medical device tax before they wrote a strongly worded letter against it.

The medical device tax wasn't the first such "surprise" in Obamacare. In 2011, it was the onerous IRS Form 1099 reporting requirement on small businesses. That was repealed. The next "wow, that was in there?" moment for congressional Democrats is Obamacare's income tax hike on middle class Americans with high medical bills, a tax that begins biting on January 1, 2013, conveniently after President Obama's re-election.

What is this surprise tax? Today taxpayers are allowed to write off un-reimbursed out-of-pocket medical expenses as an itemized deduction. According to the IRS, in 2009 (the most recent available data), some 10 million families took advantage of this tax benefit to help cope with very high medical bills. The average amount of medical costs these families can deduct totals about $8,000 (remember that these are costs not paid for by employers or insurance companies, so this is quite a burden). The average family claiming this deduction earns just over $53,000. Virtually all families claiming this benefit earn well under $200,000, most far less than that. This tax deduction saves taxpayers about $10 billion annually, according to the Office of Management and Budget.

Calculating this deduction involves what's called a "haircut" by tax accountants. The taxpayer must total all his allowable medical expenses (on average, this initial amount comes out to about $12,000). The taxpayer must then reduce this amount by 7.5 percent of his adjusted gross income (AGI), an amount which averages $4,000 for these taxpayers. What's left is deductible from taxable income.

Obamacare imposes an income tax increase on these middle class families with high medical bills. Under that law, the "haircut" is scheduled to rise from 7.5 percent of AGI today to 10 percent of AGI starting in 2013. This will increase the average "haircut" amount from $4,000 today to $5,300 next year. For the taxpayers affected by this change, the income tax hike will range from about $200 to $400, depending on tax bracket and state of residence.

Needless to say, this Obamacare tax increase is a clear violation of President Obama's "firm pledge" not to enact "any form of tax increase" on any family making less than $250,000 per year. In fact, this particular tax increase, with very few exceptions, exclusively falls on these very families.

The Joint Tax Committee estimates that this Obamacare tax increase -- one of twenty new or higher taxes in that law -- will hike taxes by $2 billion to $3 billion annually. That may seem like chump change in Washington, DC, but tell that to the family making $53,000 and coping with high medical bills. That family will have to pay $200 to $400 in higher income taxes.

As middle class taxpayers with high medical bills discover that they are part of President Obama's "balanced approach" to paying for Obamacare, they will naturally complain to their elected officials in Washington. At 10 million strong, the middle class taxpayers affected will make their voices heard. The average Congressional district has 23,000 families that will pay this higher income tax of $200 to $400. Expect Democrat Congressmen to come out of the woodwork over the next several years asking for a "balanced reconsideration" of this harmful tax increase.

The Obamacare high medical bills income tax hike is just one part of the fiscal cliff that should be dropped in the dustbin of history before it springs to life on January 1, 2013.